Capital Idea

I think Mr. Brooks on on to something. There is definitely growing sentiment in two disparate directions. The real culture war is about capitalism and, it seems to me, the critical issue is the meaning of fair. This bears thinking about.

EMH

Arnold Kling has provoked an interesting set of comments on EMH (Efficient Market Hypothesis). Whatever you think about EMH, I won’t be able to convince you otherwise. However, EMH doesn’t mean what you think it means, at least not exactly. With stocks and bonds, market prices are set by trades conducted by people who manage other people’s money. Very few of us run our own books. The market price does not reflect the judgement of owners – it mostly reflects the judgement of their agents. This has subtle implications on the theory of efficient markets. If markets are efficient, it is only from the perspective of agents.

Time Time Time

You can learn a lot by reading intelligent posts which have intelligent comments. This one by Megan about the “end of capitalism” is an excellent example. Whether you believe in free market failure or regulatory failure, you should find something to support and challenge your thinking. But, even though the arguments are good and the models are rational, everyone tends to forget the simple fact that things don’t happen instantaneously. It takes time for information to flow. It takes time to develop understanding. It takes time to plan actions. It takes time to perform actions. This is why free markets never behave as beautifully as textbooks suggest. It is also why regulation never works so well either.

Understanding Bank Problems

It’s easy to criticize what you don’t understand. It’s hard to fix problems you don’t understand. The “banking crisis” seems especially mysterious. Calculated Risk has done a great job of providing some basic understanding of how banks work and and what our current problems are. It’s in two parts, called (strangely enough) Part 1 and Part 2.

As an aside, I really appreciate blog entries which try to explain things without offering solutions, condemnations, or political agendas. I am adding a new Category to this blog: Understanding. I’ll use this to capture these kind of neutral (or nearly neutral) explanations on a variety of topics.

Tortured Logic

Whatever you think about the torture/enhanced interrogation/being mean to terrorists issue, (and most of the thinking on the Web is amazingly shallow), one thing is certain: the Congressional leaders who understood, supported, and funded the activity, and now express dismay and outrage, are despicable. I can respect the people who consistently opposed the actions and I can respect the people who continuously supported it, but the politicians who say whatever is convenient at the time deserve only contempt.

Freedom’s Foes

Don Boudreaux is getting upset with Congress. This time the issue is the intended constraints on credit card companies.

People with poor credit can actually get credit, but the terms are onerous. For some, this is the beginning of a descent into misery. For others, it means a chance to rise above difficult circumstances and a chance for success in life. You can’t have one group without the other. Congress (and President O) want to tighten the restrictions on issuing credit. This will mean reduced credit availability. Fewer people will find borrowing to be the beginning of a nightmare and fewer people will find it a life saver. No one knows how many people are in each circumstance and, even if we did, what are the ethics of keeping x people from disaster while allowing y people to flounder?

The fundamental issue is freedom. You can’t have the freedom to succeed without also having the freedom to fail. The “credit reformers” seem to believe that you have too much freedom. They would like to restrict it. Government restricts freedom all the time. You can’t, for example, store tons of gunpowder in your house. These kind of restrictions exist in order to preserve your neighbor’s right to freedom from harm due to your stupid actions.

But who is being protected with “credit reform”? The foolish are being protected from themselves while the prudent are having their options curtailed. This is the antithesis of freedom.

We’re All Hypocrites Now

It was discouraging and humbling to learn that we are all hard-wired with bad heuristics, i.e. we think poorly. The good news is that with enough discipline and care, we can usually overcome our built-in deficiencies. But neuro-behavioral research doesn’t stop, and the latest news from the front lines is even more discouraging. We are all hypocrites now.

What can be done? First and foremost, we must refrain from moral vanity. It’s an old lesson – be slow to condemn. You remember: the plank in the eye. But it’s almost as important to guard against the moral vanity of others. Here’s a good rule of thumb: if someone is “outraged” about some behavior, there’s a good chance that they’ve done something even worse. Keep that in mind when you watch, read, or listen to the news. It’s a tough race for first place in the moral vanity contest: Hollywood or Washington? But who am I to judge?

Smitten

I have found a new blog which seems to express a lot of the same thoughts I have, only with better data, crisper insight, and better writing. If you enjoy what I write, then The Daily Capitalist is a must read.

Crony Capitalism

Most people only have a weak understanding of finance, which makes it easy for those who actually do understand to take advantage. It happens every day. Some “smart guys” coat themselves with a trustworthy patina and then proceed to empty your wallet and gut your pension. It’s happening right now with the government’s involvement in the financial system. Some well connected “big boys” are going to do quite well and some political types can be confident of future rewards. This is not new – but crony capitalism is a matter of degree. Now it’s happening on a breathtaking scale. (If you care about some details…). This started under the Bush administration and has grown under Obama. I believe Bush was weary of his office and let it slip by. Obama just seems like a guy that can be easily snookered. But maybe I’m giving them both too much credit.

The Ancient Rule

Despite posts and comments such as found here, I doubt very much that human nature has recently changed. The so-called ethics problems and accountability problems are all of one ilk: agency problems. When you entrust someone to act in your behalf (an agent), their interests are never perfectly aligned with yours. Sometimes they will sacrifice your interests in favor of theirs. This is true whether the agents are corporate officers, politicians, government regulators, or the kid who mows your lawn. The only defense against this is the agent’s concern for his own reputation and your own caution. Our agents may have engaged in ethical lapses, but many of us have allowed our prudence to lapse as well. It’s a bad combination, but not a new problem. The Romans had a rule that everyone should understand and hold dear: caveat emptor.